Friday, November 23, 2012
Modern Money Theory
However it is excruciatingly painful and so first, to concentrate the mind, may I suggest the Mash theme? It goes right along with Modern Money theory. Suicide is painless.... Lalalala. But not for the survivors, huh? If you plan to be among them, or you plan for any of those you love to be among the survivors, Modern Money theory is not for you, because Modern Money theory is a justification for an economic suicide.
Modern Money theory is indeed being pushed by some idiot economists as if it were some new revelation, but indeed, the idea that governments can print money indefinitely is not. It's been tried a number of times. One example is the Mississippi Bubble, aka France's foray into paper money. As our Modern-Money-maimed commenter explains:
There are now economists tauting the idea that the U.S. could never default on it's debt Modern Money Theory True or False? (we haz a winner!)
Just like a household, government has to finance it's spending out of it's income or through borrowing? The role of taxes is to provide finance for government spending? The National Government borrows money from the private sector to finance the budget deficit? By running budget surpluses the government takes pressures off interest rates because more funds are then available for private sector investment projects? Persistent budget deficits will burden future generations with inflation and higher taxes? Running budget surpluses now will help build up the funds necessary to cope with the aging population in the future? All the above are false. St. Louis Fed: “As the sole manufacturer of dollars, whose debt is denominated in dollars, the U.S. government can never become insolvent, i.e., unable to pay its bills. In this sense, the government is not dependent on credit markets to remain operational. Moreover, there will always be a market for U.S. government debt at home because the U.S. government has the only means of creating risk-free dollar-denominated assets..." Government can never run out of dollars. It can never be forced to default. It can never be forced to miss a payment. It is never subject to the whims of "bond vigilantes".To which History, rolling around laughing and holding its sides, replies:
The weak spot in Law's scheme was his willingness to issue more bank notes to fund purchases of shares in the company. Stock prices began falling in January 1720 as some investors sold shares to turn capital gains into gold coin. To stop the sell-off, Law restricted any payment in gold that was more than 100 livres. The paper notes of the Bank Royale were made legal tender, which meant that they could be used to pay taxes and settle most debts. The company was trying to get people to accept the paper notes rather than gold. The bank subsequently promised to exchange its notes for shares in the company at the going market price of 10,000 livres. This attempt to turn stock shares into money resulted in a sudden doubling of the money supply in France. It is not surprising then that inflation started to take off. Inflation reached a monthly rate of 23 percent in January 1720.But no still-rational reader needs to read about the tragic history of vastly expanding money supplies duly followed by vastly collapsing monetary systems. No, those with a trace of actual functional brain power left only need to think about the definition of money. The definition of money I use is a functional one - money is a proxy for the exchange of goods and services.
At any given time there is a practical limit to the expansion of the supply of goods and services. Therefore, if you expand the supply of circulating money rapidly, the prices of necessary goods and services must expand to correspond, because the supply of these goods and services cannot possibly expand as quickly as the fiat money supply may.
I will expand on the unlovely real world results in my next post.
As far as I can tell, MMT is Keynesianism on steroids. The more money the better. Sheesh.
Listing the nutty things they say and debunking them would be a pleasant exercise. They say things like there would be no money if the government didn't run deficits.
They argue that since the economy isn't in good shape the risk of inflation is remote. I never like arguments for doing something because doing it won't result in something bad happening under the circumstances. There should be a good reason for doing something before doing it.
Excessive printing destroys the link between money and value. We need a bumper-sticker slogan for that.
I think MMT has a point in that Argentina and Zimbabwe are different from the U.S. They both had a legal alternative currency in circulation, and it was common practice to take payment and make contracts in either the local currency or the "hard" currency. Argentina had the dollar, and Zimbabwe had the South African Rand.
An MMT theorist can explain those away.
Or stick with the orthodox approaches. How's austerity working for you?
Here's a short explanation of MMT accessible immediately:
IMO, what this theory doesn't recognize is that at some point your money loses its value in foreign trade transactions. As in the case of Zimbabwe and Argentina. Both lost productivity because of bad government economic policies. Soon it became apparent to other nations and forex traders. According to MMT when you buy imports you are required to pay in the currency of the importing nation and the transaction is completd by a forex trader. If your productivity declines the value of your money in foreign exchange will decrease, meaning you have to pay more for imports. ie inflation.
The dollar is a reserve currrency as long as the world trades oil in dollars. When the dollar declines, oil goes up causing inflation here. As our debts increase and our producing power declines (by blocking oil & gas drilling, making it harder to farm, raising the price of electricity, etc.)the dollar's value decreases. Then you are heading toward Zimbabwe or Argentina territory. Of course it will take us much longer to get there, but MMT can't stop it.
I'm sure MOM can explain it better than I.
Actually, one of the centerpieces of MMT is that taxes are not for the purpose of funding government. The main purpose of taxation is to force everyone to use the fiat currency.
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I'm not really defending MMT--just stating it.
However, I do think MMT for the most part just states the blindingly obvious--and then draws precisely the wrong conclusions.
For example, if I didn't have to pay on the dollar value of any assets that I sell, it would make a lot of sense for me to purchase bullion or Swiss francs rather than put dollars in a savings account.
Because of the requirement to pay capital gains taxes on all assets denominated in dollars, the government captures a sizeable share of any "gains" I may have over the depreciating dollar in my savings account, which increases the risk of holding foreign currency or bullion.
So, taxes encourage the use of the domestic fiat currency.